(Bloomberg) -- Prime Minister Narendra Modi has allowed India’s subsidy bill to balloon in the lead up to crucial elections, at the risk of breaching his budget deficit goals.
Although Modi has a reputation for reducing India’s huge subsidy expenditure, data shows he’s missed the chance to rein it in. And as he prepares for state and national elections, subsidy reforms -- a sensitive issue among much of India’s vast electorate -- will be even more difficult in Asia’s No. 3 economy.
India’s food subsidies in the financial year staring April 1 have almost doubled from five years ago, the decline in oil subsidies is reversing with rising crude prices, while fertilizer subsidies have largely remained at the same level. For 2018-19, Modi’s overall expenditure rose only by 10 percent but he allocated 15 percent more for three major subsidies -- food, fertilizer and petroleum -- against an increase of 12.6 percent a year earlier.
"He is just like any other government before -- he is unable to take hard decisions,” said Mohan Guruswamy, a former finance ministry official and chairman at the Centre for Policy Alternatives in New Delhi. “Unless you have capital expenditure, you will not get growth and you will not get jobs. And to increase capital expenditure, you need to reduce subsidies.”
After coming to power in 2014 with the biggest mandate in three decades, Modi signaled his administration would cut the subsidy bill to boost the economy and attract investment. Two months later, his Finance Minister Arun Jaitley proposed to “overhaul” food and fuel subsidies to narrow the fiscal gap.
In January 2016, Modi said the government planned to rationalize and target subsides rather than end them. But after the ruling Bharatiya Janata Party won a hard-fought battle in Modi’s home state in December, the government’s zeal to cut down handouts seems to be fading. As Modi faces eight state assembly polls this year and national election in early 2019, his administration’s gone quiet on phasing out subsidies.
“There is a very clear and imminent risk to fiscal deficit,” said Arvind Mayaram, a former top bureaucrat in the finance ministry and the chairman of the CUTS Institute for Regulation & Competition, noting the deficit had already been breached. "The government may have to borrow more than what it has projected in the budget.”
In the Feb. 1 budget, the government relaxed its deficit target for the year ending March, and said it would aim for a fiscal gap of 3.3 percent of gross domestic product next year rather than its earlier 3 percent goal. Last week, the central bank raised inflationary risks from an expansionary budget but kept a neutral stance on interest rates, providing some cushion to the bond markets.
When oil prices were falling, Modi seized the moment and linked the price of diesel to market. He tried to plug leakages in the subsidy by introducing the biometric registration and directly transferring cash to bank accounts, leading to savings of 570 billion rupees (8.86 billion).
Still, the overall subsidy bill of the government is not falling. Modi’s initiative to boost liquefied petroleum gas usage in rural areas and provide subsidized food to a widening pool already reeling under rural distress has ensured it remains high.
“Commodity prices are going up and there’s a risk that the oil bill will rise quite sharply,” Raghbendra Jha, an economics professor at the Australian National University, said by phone. “The government will like to play safe before elections and increase subsidies that will test the fiscal deficit.”
Doling out subsidies is a time-tested tool to win votes. It worked for the previous Congress-led government which had a return to power in 2009 after announcing a significant increase in subsidies and waiving loans for small farmers.
“In election year, the main task is to win elections, not to balance the budget,” said Guruswamy.
©2018 Bloomberg L.P.